Reserve Bank's surprise hold spares floating borrowers another rise, but savers may lose out
Floating mortgage rates have no reason to rise this month. The Reserve Bank held the official cash rate at 2.75% on Wednesday, against expectations of another hike 10 days out from the election, 1News reported.
Markets had almost fully priced in a 0.25-point rise, according to Westpac economists' review of the decision, republished on ActionForex. Had that rise reached floating rates in full, it would have added about $104 a month in interest on a $500,000 floating balance.
Fixed rates work differently. They follow wholesale rates, which reflect what banks pay for funding, more closely than the Reserve Bank's announcement itself. The Herald reported that wholesale rates fell after the decision, particularly sharply for shorter terms.
Wedge founder Dave McLeish said the hold would keep shorter-term mortgage rates at bay for now, the Herald reported. He thought banks could even cut the odd special mortgage rate to win customers.
Sean Keane of JB Drax Honore was more cautious. He said wholesale rates would need to keep falling to push banks into widespread cuts, and he couldn't see banks making major changes before the 7 November election.
For anyone refixing, the Herald gave September's averages. A new standard one-year mortgage averaged 5.55%, up 0.45 points on November last year. A two-year rate averaged 5.86%, up 0.58 points.
Savers come off worse. McLeish said the drop in short-term wholesale rates could stop shorter-term deposit rates, which are heavily influenced by the OCR, from rising. Longer-term deposit rates usually take more of their cue from global markets.
In September, new six-month deposits averaged 3.59% and one-year deposits 4.02%, according to the Herald. Three-year deposits averaged 4.49%, 0.8 points higher than in November last year.
Borrowers shouldn't read the hold as the end of rate rises. Governor Anna Breman said the bank would "likely" keep raising the OCR towards a neutral level, the Herald reported. That's the level at which the OCR neither speeds up nor slows the economy. She suggested it might need to go further than its September outlook, which had the OCR reaching about 3.25%.
Westpac still expects a 0.25-point rise on 9 December and a peak of 4% in September 2027. But its economists say a December hike "is not a done deal". It will depend on fuel prices, inflation expectations, whether price rises spread through the economy, and global risks.
The decision was close, with the committee split 4–3.
Breman, new committee member Rebecca Williams and external members Prasanna Gai and Carl Hansen voted to hold, the Herald reported. According to Westpac, they argued the two recent OCR increases needed more time to work. They pointed to weaker-than-expected inflation in the September quarter and to higher fuel prices having less knock-on effect on other prices than anticipated. Stable inflation expectations, subdued wage growth and continued weakness in household spending and investment also featured in their case.
Chief economist Paul Conway, assistant governor Karen Silk and external member Hayley Gourley wanted a rise. Westpac said they put more weight on persistent underlying inflation and the risk of it becoming entrenched. Core inflation has sat above levels consistent with the 2% target midpoint for some time.
The next decision is on 9 December, when the Reserve Bank will also publish a full Monetary Policy Statement and updated forecasts. Westpac lists the data due before then. September-quarter labour market figures come out on 4 November and October selected prices on 17 November. Reserve Bank surveys of inflation expectations land on 17, 20 and 24 November.